Just another WordPress.com weblog

Archive for the tag “#Government Budget”

The story which I wanted to share is there are few friends (from Debian as well as elsewhere) who shared that they didn’t get the whole demonetisation play or what the Government is/was trying to do. As budget is just round the corner (India will be presenting its yearly budget on 1st of February), thought it is prudent to share at least some basics, ideas and theories of what goals the Finance Minister would be looking at when presenting his budget. I would NOT talk of Inflation targeting or some such exotica as those topics would require their own blog-posts altogether. I would mainly be talking a bit about Taxation and in that Personal Income Tax. I would also not use words like ‘Receivables’ and like which thought bit more accurate are not used in everyday language.

Just like Private Companies and increasingly public utilities, The Government of the day has two-three different aims when it is presenting a budget –

a. The first is to give an update about how things went last year. Did all the incomes that were projected, did it happen or was there a short-fall ? If there was a short-fall what were the reasons for the shortfall.

Similarly, did all the budgeted expenditure earmarked for the year was spent and were it spent under the heads they were supposed to ? If not what went wrong there ? There is usually a tussle between Planned and Unplanned expenditure and one of the hallmarks of good governance is that unplanned expenditure is kept at minimum, while planned expenditure and projects completion or/and assets coming on-line were within the estimated time-frames.

So these updates are given to the Parliament and hence public at large.

The second and the more interesting part are the plans for the immediate future, 1 year down-the-line. Based on the performance last year, a bit of crystal-ball gazing of external and internal conditions of the country, the Finance Minister along with her/his colleagues of Finance Ministry.

Trivia – There hasn’t been a female finance minister till date in India.

The Finance Ministry as a whole also holds consultations with most sections of the society before sharing/putting his Fiscal Policy (Planned Expenditure) for debate and passage in form of the Budget. While the budget itself is a technical exercise, it is also a Political exercise as both the budget and the finance bill (which contains the taxation proposals) need to be passed in Lok Sabha (Lower house).

After passing scrutiny of Lok Sabha (Lower House having people’s representatives directly elected) and Rajya Sabha (Upper House, indirectly elected), the taxation proposals becomes the law. It isn’t that simple but for our understanding, keeping it simple. This Political model of governance with two houses is modeled under the British (Westminister) model since 1947.

The Government, just like any other Organization gives a similar Profit and Loss Account and a Balance Sheet.

How A country’s budget is made. A representational and simplified version of how things flow was made using Graphviz. Click on it to see image in detail.

It might be possible to make the graph much better than it is currently .

The Profit and Loss Account of the Government tells what Incomes it is projected to earn in the upcoming year and whatever Expenditures it hopes to do this year.

The Income and Expenditure independently can be bifurcated into two, Revenue Income and Capital Income and Revenue Expenditure and Capital Expenditure.

Indian Railways EMU local train

The simplest example of such planned expenditure which comes to my mind is the Indian Railways Budget which is all planned expenditure. As can be seen even with ample funds Railways were able to spent only 50% of the total amount disbursed last year. Similarly income generation for Railways was far below the target.

Examples of Revenue Income include taxes of all sorts, while Capital Income are rare, like divestment/stake sale of a company owned by the Government. These are usually one-off events.

Examples of Capital Expenditure is when the Government makes a road, makes a bridge etc. Usually large expenditures come under Capital Expenditure while salaries to Government employees and routine expenditures are known as Revenue Expenditure.

There was a statement by the present Government that the last 6-7 years the budgets has been more or less static as far as numbers are concerned. This hampers Government’s ability to take up any new work.

The Revenue income earned by the Government can again be bifurcated primarily into two Direct Taxes and Indirect Taxes.

INR 2000 Rupees

Direct Taxes are those which the Government earns through Personal Income Tax and Corporate Tax. As only 1 percent of Indians pay Personal income tax, the rest Government tries to raise by –

Corporate Tax (which is told to be higher than neighbouring countries around us)

Indirect Taxes like VAT (Value Added Tax introduced in 2005 over select items at 1% and now it’s almost 15%,)

Duties on all imported goods depending on what the Government thinks of a certain class of goods.For instance, should life-saving drugs be taxed or not and going either way has immediate as well as long-term consequences.

Hence the Government of the day is in fix. It needs to have more money if it wants to invest into infrastructure, defence spending, social spending such as health and education and so on and so forth. It cannot –

raise VAT rates more as it may stall public spending

raise Corporate Taxes beyond a point otherwise people may either start doing work in black or shadow economy or may leave the country, a term used to describe this is also Capital Flight.

raise personal Income Taxes beyond a point otherwise the same thing will happen as above.

Another point is that unlike China which is a Large State-backed Enterprises Export-led Economy which has its own problems, India’s economy is much more consumption-based, hence any large tinkering upwards may possibly stall whatever little spending the middle-class does, similar to the stall in consumer durables which has been happening over the last few years.

There are a couple of short-term solutions that the Government may do –

It can raise finances from the market by using a mix of debt and equity instruments such as Bonds and targeted finances for specific schemes under EEE (Exempt, Exempt, Exempt or EET i.e. Exempt, Exempt Tax)

The Government prints more money

While both seem to be attractive ways, but both have their disadvantages also, both have costs associated for them. In the first one, like any other scheme, when any scheme is launched, it needs to be underwritten by GOI which means even if it’s not a success they would have to service all and any obligations towards investors.

Also they have to be careful how much they are borrowing as excessive borrowing for today could lead to a Greece-like meltdown situation, whether internal or external borrowers. With external borrowers they also usually like to have a guarantee that the Rupee will not slide beyond a point otherwise the Government will have to pay all and any losses but this is going beyond what I wanted to share.

Printing excess money in the system could lead to loss in the value of the money itself as well as leading to inflationary pressures which leads to more problems for the poor and greater inequality between the classes among other things.

So while the Government may use all of the above ways in varying degrees, the present Government had the idea that if we were to reduce black money or hidden economy (AFAIK no country can claim to completely eliminate it) we would be able to raise the finance we need without a major cost associated to it. For instance, I was reading that even in Canada, it is expected that 20% of black money/shadow economy works and that assessment is by their own taxation authorities.

So While doing demonetization, it came out with an equivalent Black Money Declaration Scheme (IDS). The idea is simple, even if 1 percent of the population comes in the traditional tax net the Government of the day would be able to enhance budgets to various expenditure.

Now while the idea is good in theory, implementation has been the Achilees heel. While the Government’s expected something like 15% of the whole economy was black money or shadow money, almost 95% of the money in circulation came back in Banks during demonetization ( These are unofficial figures, Finance Ministry/RBI would be disclosing the real figures on 1st of February 2017 so we will know).

It is suspected that 10% of money in Banks is black money. There are considerable costs to search analyze, prove in the court of law that it is so. There are and would be considerable costs to train new officers as existing Income Tax Officers are already burdened with Advance Tax being paid by Corporates and small business-man paying round the year (every 3 months), The existing Income Tax Officers already have their hands full.

Also till Governments don’t fix up realty sector/real-estate sector and other places where the black money/shadow economy may prevail. Hence all the training, salary, buildings where new Income Tax Officers could work, infrastructure, new buildings where suspect cases have to be tried and lawyers for those. As have shared a few times on this blog, India has almost 29 million court cases pending in the lower judiciary alone. Unless any such cases are not successfully tried within time by the Government, it would be a waste. Now whether the Government knew of these issues or not would probably be never known.

Lastly, there is a voluntary part that the Government hopes, that they will by themselves join the mainstream tax-paying public. This might happen but any such happening will happen over years. People make their own choices. And unless there are not any stick and carrot approach to the Government’s Policies people will tend to go back to their old ways.

I would share an example from the demonetisation process which would help prove my point –

During demonetization, there was a great push towards doing digital transaction either via smartphones or greater usage of debit and credit cards etc. For the first 60 days till 31st December 2016, you could do digital transactions without paying any transaction fee. During that period, I used my Debit card to shop, to eat at restaurants or/and even small shops.

But come 1st January 2017, the charges for digital transactions are anything between 1.5% to 3% of transactions. Naturally, I stopped using them and use them very sparingly where cash won’t work.

So at the end, while the Government made the whole demonetization drive to drive out shadow economy, terror financing etc. While terror financing has been hurt quite a bit, the same cannot be said of the shadow/black economy.

It seems that the Government would need to close many more doors and windows before people join the mainstream. While Politically it was risky, socially it was also a bit risky move as it was uncertain how and where things will move. Venezuela tried the same thing and fell flat on its face.

All said and done, if and when people become part of the tax-paying class/people, The most optimistic idea that the Government has that everybody will go cashless and it would be far easier to find out who’s not paying taxes. As shared before, I don’t think this will happen unless the charges for cashless is at 0.05% or something similar.

Even IF people do join the mainstream, it is very much possible that the present Govt. will not enjoy fruits of this labour as fruits might come in 2018/19 or even later even if they do come.

So whether the decision had the right affect or not, we may never come to know. Governments tend to tinker around with the figures as well. But I hope some idea of how things happen is known now.

support wikipedia

Vervearth

Tarot card

You are The Fool

The Fool is the card of infinite possibilities. The bag on the staff indicates that he has all he need to do or be anything he wants, he has only to stop and unpack. He is on his way to a brand new beginning. But the card carries a little bark of warning as well. Stop daydreaming and fantasising and watch your step, lest you fall and end up looking the fool.